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Portuguese people who have variable rate mortgages, especially those who have bought a house in recent years, must reach the end of this year with monthly payment increases which should approach 100 euros per month – increases of around 25% compared to the average maturities paid by these new contracts. This is the foreseeable impact of rising interest rates, strongly signaled by the ECBin mortgage payments – but it could be even worse if the rise in interest rates on the markets continues to surprise by its speed.
So far, reality has taken precedence over fiction. if in mid-February, the Observer warnedon the basis of futures market indicators, that the 12-month Euribor could go back to positive “ground” in June, upon arrival in this month of June not only this 12-month index is well above zero (0.361%) but, also, the six-month Euribor is very close to passing, too, to a value above zero.
In Portugal, about half of mortgages (at variable rates) are indexed to the 6-month Euribor, which is currently at -0.068%. But in recent years, banks have entered into credit agreements favoring 12-month Euribor indexationmeaning that a greater percentage of clients are exposed to the upside of an index that started 2022 below -0.5% and is already above 0.35%.
According to calculations by economist Nuno Rico, linked to DECO Proteste, loans made in 2020 (the most recent year for which Banco de Portugal has already published official data) new credit agreements will have an average monthly payment of 338 euros at this time a month. There is still no data for 2021, but it is likely that it will show that the average performance is even higher, says Nuno Rico.
Partly due to rising property prices, these newer loans tend to be larger, with an average debt of 119,000 euros and a maturity of 33 years. These two values contrast with the 62,000 euros which is the average of all “living” loans in Portugal, including the oldest and most recent, with an average maturity of 21 years.
In the case of these more recent credits, if the Euribor (12 months) rises to 1% then the deposit will rise to 424 eurosaccording to the calculations of the economist of DECO Proteste – an increase of 86 euros, or 25%.
The risk, however, is that the 12-month Euribor end 2022 at a level still above 1%especially if the escalation of inflation continues to give no respite and that the ECB (and the other Western central banks) must raise interest rates more quickly, a possibility that Christine Lagarde does not exclude.
Current market data indicates that the Euribor rate within six months could end the year at 0.88%. There are no comparable data for the 12-month term, but the current differential between 6 and 12 months is currently around 42 basis points (ie the difference between -0.068% at 6 months and 0.361% at 12 months).
Even if this spread narrows in the coming months, it is likely that if the 6-month Euribor actually reaches 0.88%, then the The 12-month Euribor will easily exceed 1% even before the end of 2022. In this case, the same average monthly loan payment – currently at 338 euros – could rise to almost 450 euros before the end of the year, increasing by more than 100 euros.
This increase in benefits “will occur at a time when the cost of living is increasing, due to inflation, which could lead to these additional difficulties for many families”, explains Nuno Rico, of DECO Proteste. This Tuesday, the INE revealed that the Inflation rate accelerated to 8%the highest value since February 1993.
It will depend on a case-by-case basis when each family will experience the increase in benefits. Depending on whether the index is three, six or 12 months, it is only during the revision of the slice (which takes place in the respective timeframes) that the new values will be reflected. But, hypothetically, someone who has examination of the deposit with the average of this month of May will already feel an increase of a few tens of eurosaccording to the index found in the contract.
Emphasizing that this is a normal phenomenon of rising interest rates – and would have come sooner had it not been for the pandemic – Nuno Rico recalls that “between 1999 and the end of 2021, the average Euribor stood at 2%», with periods well above (more than 5% in 2008 was the peak) and others much lower, including at negative levels, as in recent years. But the historical average is around 2% and “it is expected to converge to a value similar to this”.
Nuno Rico predicts that “we will face Euribor rates between 1% and 2% in the near future“. The unknown is the speed at which these levels will be reached: “if the increase is very rapid, it will occur in a context where families have again increased their indebtedness”, with the continuous rise in property prices, which hit records despite the impact of the pandemic.
To deal with these increases, the economist first says that “it is at this stage that a lot of proactivity is needed on the part of the consumer“, who must manage her credit(s) as she manages, for example, promotions by “shopping at the supermarket, to avoid surprises”. It starts, says Nuno Rico, by “contacting the bank and asking them to calculate exactly what will happen to the payout if Euribor rises to 1% or more.”
If the increase brings the benefit closer to the “reference effort rate of 35% of the family budget, or even exceeds this value, then it is important to act immediatelyand not wait to get into difficulties to act, warns Nuno Rico.
One of the hypotheses, in this case, would be to renegotiate the terms of the contract. many people have spreads of 2% or more and, out of inertia or ignorance, they do not try to renegotiate with the bank – “improves easily” to spreadwhich is the bank’s profit margin added to the index (Euribor).
Even if the bank frowns, at an early stage “the only thing the customer has to do is get simulations and present them to their bank, which the bank will normally accept because they don’t want to lose the customer. “says Nuno Rich. If the bank does not want to download the spread, wire transfer is an option to consider – especially since many banks take care of everything and charge no fees.
However, if the customer “already has very advantageous conditions, including spreads below 1%, then there will be less room to renegotiate the cost of the down payment,” says Nuno Rico. “However, even there, if the increase in benefit is not affordable, there may be other solutions such as term extension or ask for one Grace period (where for a time only interest is paid or less principal is paid).
On the other hand, whoever has this possibility must consider early amortizations credit, which can then reduce the monthly payment. “If I have accumulated savings and if the return on these investments is lower than the rate charged on credit, then it must be amortized,” advises Nuno Rico.